14.6.17

U.K. Squeeze Tightens as Real Wages Drop Most in Almost 3 Years

The squeeze on U.K. households intensified in the three months
through April as weaker wage growth inflicted the biggest loss of
purchasing power in almost three years.
Average earnings rose 1.7 percent, the slowest annual pace since
early 2015, the Office for National Statistics said on Wednesday. Taking
inflation into account, they fell 0.6 percent, the largest drop since
August 2014. Barclays said the situation will continue to worsen this
year, while HSBC said the pressure on consumers will last longer than it
previously anticipated.
The fall in living standards is already sapping consumer confidence,
weighing on an economy that relies on household spending and piling
further pressure on Prime Minister Theresa May following the election
that cost her Conservative Party its parliamentary majority. Retailers
are the second-worst performers in the FTSE 350 Index over the past
month.
ING Bank described the latest wage number as “shocking” and
reiterated its view that the Bank of England won’t raise interest rates
before 2019. The central bank, which announces its next policy decision
on Thursday, forecast last month that wage growth would pick up in 2018
and 2019.
“Given the uncertainty related to Brexit, and also now the overall
U.K. political environment, we suspect that this forecast might prove to
be optimistic,” said James Smith, an economist at ING. “Whatever
happens, what is clear now is that real incomes are falling noticeably.”
The figures may increase pressure on the new minority government to
ease its budget-cutting program. Public-spending cuts were among the
reasons why the Tories performed so badly in the election last week, and
the slide in purchasing power will make further austerity harder to
bear.
Britain was the worst-performing Group of Seven economy in the first
quarter and BOE Governor Mark Carney has warned that households face
“challenging times” for the rest of the year, as uncertainty ahead of
talks on leaving the European Union keeps pay subdued.‘Sharp Contrast’
Wages are failing to pick up despite a robust labor market.
Unemployment fell 50,000 between February and April, leaving the jobless
rate at a 42-year low of 4.6 percent, and the number of people in work
climbed 109,000 to a record 32 million.
“The sharp contrast between our terrible record on pay and strong
jobs performance shows that the currency-driven inflation we are
experiencing is not feeding through into wage pressures and is simply
making us all poorer instead,” said Stephen Clarke, economics analyst at
the Resolution Foundation, a think tank.
Inflation is now close to 3 percent and rising, the result of the
plunge in the pound since the Brexit vote a year ago. That’s having a
material impact on consumer spending, with figures Thursday forecast to
show retail sales fell in May for the second time in three months.
Budget grocers’ sales are rising as consumers forego non-essential
spending and department store John Lewis has seen sales growth this year
fall to 0.9 percent from 6.4 percent a year earlier. Retailers are down
2.5 percent over the past month, whereas the FTSE 350 Index has risen
1.3 percent.
The pound weakened following the labor-market data. It was at $1.2733 as of 11:42 a.m. London time, down 0.2 percent on the day.
Wage growth including bonuses slowed to 2.1 percent between February
and April, leaving inflation-adjusted earnings down 0.4 percent. Real
earnings fell 1.5 percent in April alone, the most in three years.
The ONS said its earnings data have been revised back to the start of
the series in 2000 to better reflect the wages paid at small
businesses.